SHANGHAI--Audi AG has halted talks over a possible sales and distribution tie-up with China's largest auto maker, after its dealers in the country threatened to stop taking Audi vehicles and demanded compensation in protest.

In a letter to its dealers reviewed by The Wall Street Journal, the German premium car maker said it will suspend talks with SAIC Motor Corp. over potential car sales-and-distribution network ventures until it has reached an agreement to ensure dealers' longer-term profitability. In the letter, Audi said it would resume discussions with SAIC no later than March 31, 2017.

The letter, signed by Joachim Wedler, president of Audi China, was issued late Wednesday after a meeting between the car maker and dealer representatives in Beijing.

A spokesman for Audi wasn't immediately available for comment. The company has previously said it will address dealer interests in open talks with network partners.

Audi made the compromise after its planned tie-up with SAIC met strong headwinds from its Chinese dealers.

Representatives from 15 dealer groups, which combined have 150 Audi dealerships, last week argued that such a move would dilute their already thinning profits as sales slow. The dealers threatened not to take any cars from Audi from December if the company continued its talks with SAIC, and would demand "tens of billions of yuan" in compensation for potential lost sales.

Currently, Audi makes and sells cars in China through a three-party venture withVolkswagen and FAW Group Corp. Dealers say an additional joint venture would add more dealerships to a network already struggling with slower sales and sliding profits.

Friction between car manufacturers and dealers has risen sharply in recent years because of slowing sales and rising inventories. BMW AG last year agreed to lower sales targets and pay 5.1 billion yuan, or $740 million, in subsidies to resolve a dispute with dealers.

Audi now has about 460 dealerships in China. They sold more than 440,000 Audis in the first nine months of this year, nearly a third of the company's global sales.

Rose.Yu@wsj.com

(END) Dow Jones Newswires

December 01, 2016 00:11 ET (05:11 GMT)

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